"I have a Slovak address card, so I don’t have to pay taxes in Hungary…" "I just have to make sure not to spend more than 183 days at home". "I’m a digital nomad, I don’t pay taxes anywhere." Many similar misconceptions circulate in Hungary regarding the rules of tax residence. However, tax regulations are “much smarter” than that and those who follow false illusions may even be exposed to criminal liability.
Until recently, with a little exaggeration, the subject of tax residence existed in Hungary on the paper of tax laws and international tax treaties only and its examination was never in the focus of tax audits. This has led to a smaller “wave of emigration” since the early 2000s - mostly with destinations to Slovakia, Malta and Dubai. At least according to the address records.
However, a few recent cases have shown that the tax residence of individuals is no longer a pristine area at the Hungarian Tax Office. For instance, the tax office examined the tax residence of an individual who had “moved abroad” in a case hardly a year ago. In doing so, also analysing the cell information of the individual’s telephone, they came to the conclusion that the person had only formally changed its tax residence. And the High Court upheld the tax office’s decision, thereby raising the stakes in the game.
Why is tax residence so important?
Because the country where an individual is resident for tax purposes can tax all of that person’s income - regardless of where the income came from. Certain types of income are exempt from this main rule, if a double tax treaty exists between the two country which , for taxation by the “source country” for certain incomes. In such case, the country of residence either exempts the foreign income from taxation or credits the foreign tax.
But in which country am I resident?
Contrary to popular misconceptions, both domestic and international tax regulations attach importance in this respect primarily to the factual circumstances, and not to the easily changeable formalities and records.
In the first place, the internal law of a specific country determines who is considered to be a resident there. This can be based on nationality, permanent residence, habitual residence, residence permit or a number of other factors. And if someone is considered to be resident in more than one country under the internal rules, the double taxation treaties determine which country may retain the option of taxation according to residence.
In such cases, the individual is primarily resident in the country where he or she has his or her “permanent home”. This “home”, however, is not “that home”… For the purposes of tax rules, the permanent home is any physical place that serves the regular or long-term stay of an individual (up to a few months of the year). The fact that the individual has an address card does not in itself determine the issue of permanent home.
In the case of several "permanent homes", residence is determined by the location of the centre of the individual’s vital interests. This is an extremely difficult and subjective criterion to apply. What is examined here is the country with which the individual has the closest connections in terms of personal, property, economic and cultural ties - which often do not coincide (such as when someone works abroad but his family has stayed at home).
The so-called “183-day rule” is only analysed after that. That is, if a person has more than one permanent home and the centre of his vital interests cannot be clearly determined, then the person’s residence will be where he or she spends most of the tax year. But we rarely get this far.
So now how can someone become a resident of Dubai or Malta?
Based on the above criteria, even in the light of scanty case law, we can establish that a relatively “safe” change of residence requires moving abroad for at least two years, staying there with a normal home, not spending more than two months a year in Hungary and if family members include a husband, wife, child, dog or even a turtle, they must also move abroad. Otherwise, a Hungarian citizen leaving the country would have a hard time proving that the centre of his vital interests has moved abroad. And if he has only moved in the address register, the battle plan will already be crushed on the criterion of permanent home, which isexamined as a matter of fact.
And what about digital nomads?
A product of our era are the so-called digital nomads, software developers who travel all around the world every year and consider themselves homeless for tax purposes. Do they really evade taxation? It is indeed more difficult to establish tax residence for such persons, but there is - there must be - always a country that has most grounds to establish that a digital nomad is resident there. And if such country does not claim its nomad, then another country might appear down the line. Everyone must pay its check somewhere.